Econ 101: Example Issue – Labor Unions

Our second example issue is labor unions and their effects on the economy. I wrote a few different drafts of this, and I almost didn’t post it at all because my conclusion has basically been touched on in earlier posts. This is another one that tends to be politically-charged, so again I do my best to stick to the economic effects without passing judgment on the goodness or badness of unionization as such.

A labor union is “an organization of workers formed for the purpose of advancing its members’ interests in respect to wages, benefits, and working conditions,” according to Webster’s dictionary. The way that a union advances its members’ interests is by negotiating with the members’ employers for an employment contract. Their primary bargaining chips are the threat of bad publicity or a general work stoppage (a strike).

Economically then, we find that labor unions act as a cartel of labor service suppliers, setting the price of labor services above what it would be if each individual supplier of labor services had to reach his or her own price agreement with the buyer of those services, the employer. As we’ve seen with the minimum wage, a higher-than-market price for labor will necessarily lead to less labor being employed and fewer of the products of the employing company or industry being produced. If the union negotiates a contract for a higher wage, for example, any current employees subject to that contract will enjoy increased earnings. At the same time, fewer new workers will be hired, and any workers not subject to the contract may see a reduction in wages, a reduction in hours, or termination of employment.

The net result, then, of having a cartel of labor service suppliers in a company or industry is that fewer workers will be hired, less output will be produced, and prices will be higher than would be if the employees and the employers had to agree individually on the price of their labor services. Whether these seemingly negative effects outweigh the benefits gained for the workers is not a question for a discussion of the economics involved.